(Bloomberg) -- Emerging markets on Monday braced for Donald Trump’s second term with stocks languishing at the biggest-ever valuation discount on record for a US presidential inauguration day, and some bond spreads at the most expensive for the occasion.
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The MSCI Emerging Markets Index started the day 46% cheaper than S&P 500 Index based on forward price-earnings ratios, the most since Barack Obama’s first day at office in 2009, the earliest data available. The discount for price over trailing 12-month earnings was 49%, the biggest since Bill Clinton’s second term, even though the gauge rose for a fifth day amid bets Trump will pursue a gradual approach to trade-tariff hikes.
EM local-currency bonds traded at an average yield below Treasury rates, the first-ever negative spread on an inauguration day in data going back to 2009. Credit default swaps, at a mean 163 basis points, have never been lower on a swearing-in day since Obama. The yield premium on dollar-denominated corporate bonds was the narrowest for the event since at least 2005.
That’s a contrast to US assets, where stocks are historically expensive relative to bonds. While EM bond traders are focusing on absolute yields and accepting ever-tighter spreads, the anemic risk premium could be a point of stress if Trump’s administration — especially its early executive orders — sparks a risk-off move in global markets. The cheapness of stocks, on the other hand, leaves them attractive for bargain hunters should Trump’s policies spark a risk-on shift.
“Despite a positive earnings trajectory, EM equities remain under-owned by investors, largely due to US policy actions, a strong dollar, and elevated US interest rates,” said Aarthi Chandrasekaran, the Dubai-based head of asset management at Shuaa Capital Psc. “On the other hand, EM bonds are facing tight credit spreads. The direction of these spreads will likely skew toward widening, driven by the potential impact of tariffs and ongoing uncertainty, which could trigger a decompression trend.”
A mini-recovery in EM assets was already visible on Monday, with the stocks index heading for the biggest five-day gain in more than three months. Currencies were also higher for a fifth day, led by the South Korean won, Czech koruna and Thai baht. CDS spreads eased for a second day. The gains came as the US dollar weakened and money markets signaled improved odds on a Federal Reserve rate cut by July.